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Russian police say they have closed the case file on the country's largest tax fraud. It occurred on December 24 in 2007, when Moscow tax officials approved a same-day refund of 5.4 billion rubles -- or $230 million -- to a gang masquerading as officers of Hermitage Capital, once the largest hedge-fund manager in Russia and founded by financiers Edmond Safra and Bill Browder. Interior Ministry police claim the complex scam was pulled off by a sawmill worker and a burglar, both currently serving five-year sentences, in cahoots with four others, all of whom are now dead. One had a fatal heart attack before the crime took place. A second fell from his balcony. The third plummeted out a penthouse window.

And then there was Sergei Magnitsky, a 37-year-old lawyer for Hermitage who died in prison after complaining police were torturing him to retract evidence that the $230 million had been stolen by a ring of corrupt tax officials, Interior Ministry cops and career criminals. Magnitsky's November 2009 death made him an icon to those who want to clean up Russia's chronic corruption -- yet the Interior Ministry surprisingly turned the tables, claiming he was one of the culprits. The police ministry exonerated the cops and tax officials who Magnitsky had accused -- most of them got promotions.

As for the $230 million, almost all of it is still missing. Interior Ministry spokesperson Irina Dudukina told Barron's on Tuesday that all the bank records police needed in order to trace the loot were in a truck that crashed and exploded in 2008.

The case may have ended there for Russian authorities, but Hermitage's London-based chief Browder has devoted himself to pursuing those he holds responsible for the original crime and Magnitsky's death. In English and Russian campaigns on a Website (russian-untouchables.com) and on YouTube, the investor has presented evidence that he says proves the tax heist was an inside job and has asked the public to send him additional evidence.

"The facts of this case are absolutely damning for the Russian government," says Browder. "First Sergei Magnitsky uncovers and reports criminals preparing a major crime three weeks before it happens, and the police do nothing. Then Russian tax officials make the largest fraudulent tax refund in Russian history, in one day, on Christmas Eve, to a convicted murderer, with no questions asked."

Browder's outreach program has paid off. He recently received new evidence that raises questions about the Russian government's official story that honest bureaucrats were tricked by wily outsiders. The records from two secret accounts at a
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branch in Zurich show that shortly after the huge tax payout was approved by the Moscow tax bureau run by Olga G. Stepanova, her husband received $10.9 million (seven million euros) in his Cyprus shell corporation. The Credit Suisse accounts also were the source of funds for $800,000 in construction payments for the couple's seaside villa in Montenegro and for $4 million toward another villa on Dubai's fabulous Palm Island with two additional condos for Stepanova's tax-office deputies.

And those were just Stepanova's vacation homes. A year after the tax scam, Stepanova's family was living in a $20 million mansion outside Moscow, designed by Russia's celebrity avant-garde architect Alexey Kozyr.

The money arrived at Credit Suisse through a globe-spanning trail of shell companies created by a Who's Who of offshore-secrecy consultants -- including a New Zealand agent whose operation we've previously found amid North Korean arms trafficking and money laundering for a Mexican drug cartel (see "Small New Zealand Firm's Link in Smuggling Case," Jan. 4, 2010).

It would be hard to reconcile Stepanova's impressive show of wealth with her income. Russian anti-corruption rules require officials like Stepanova to report their family income. Those public records show that in the last decade, she and her husband reported an average of just $50,000 in annual income.

Browder says Hermitage got the secret Swiss bank records from a Russian businessman who told Hermitage he was part of a network that paid Stepanova and other officials for their roles in the embezzlement of state-tax funds. Magnitsky's death disillusioned him. After sharing the bank records with Barron's, Browder filed a money-laundering complaint with Credit Suisse and Switzerland's federal attorney general. By law, the bank then had to freeze the accounts while Swiss regulators decide whether to seize the money and possibly cite Credit Suisse officials for neglect of their anti-money-laundering responsibilities.

Credit Suisse declines to comment about client relationships, but says it complies with all money-laundering laws. Stepanova couldn't be reached at several previously listed phone numbers. She and her deputies, as it turns out, resigned from their positions at the Moscow tax bureau in January, after a Federal Tax Service audit raised questions about $150 million in suspicious tax refunds unrelated to the Hermitage case. But Stepanova quickly found work with her former Tax Service boss, who is in charge of Russia's new federal agency that President Dmitry Medvedev tasked with supplying equipment to all the nation's police and military. At the beginning of April, the Federal Tax Service reported that Interior Ministry police had raided Stepanova's former tax office. In a twist worthy of a Russian novel, they arrested not Stepanova, but the tax official who had carried out the audit on her.

Incidents like these help explain why the country's RTSI stock index, which rose faster than the benchmarks of other developing countries in the last six months, is still priced at just seven times this year's expected earnings -- about half the multiple of markets like China and India. Investors are unwilling to pay up for shares in countries with big political risks, which others call a corruption discount. Under Prime Minister Vladimir Putin's rule, the so-called siloviki -- members of the major security agencies, such as the police of the Interior Ministry -- have gained power, but their rise has help chill relations with overseas investors worried about the state of Russia's legal system and democratic institutions.

THE AMERICAN-BORN BROWDER started Hermitage in 1996, with the backing of famously well-connected international banker Safra, to let foreigners participate in Russia's privatization of its state enterprises. Browder's grandfather may have led the American Communist Party in the 1930s, but the grandson was no apparatchik. To keep Russia's first generation of corporate managers from ripping off its first generation of shareholders, Browder found he had to become an activist critic in companies like Gazprom (ticker: GAZP.Russia) and Sberbank (SBER.Russia). The Hermitage manager made himself enough of a pest that in November 2005, he was prevented from re-entering Russia as a "threat to national security." After that, he worked from Britain, where he had become a citizen.

At the start of 2006 Russia repealed the law restricting ownership of Gazprom shares to domestic entities. So Hermitage and similar vehicles for foreign ownership transferred their holdings en masse, realizing large capital gains and tax liabilities on their stock sales. In Hermitage's case, the 2006 tax bill came to 5.4 billion rubles, or $230 million.

Hermitage officials never guessed at the continuing significance of that big tax payment, as their Moscow offices were raided in June 2007 by Interior Ministry police under the command of Lt. Col. Artem Kuznetsov. While saying they were seeking information about one of Hermitage's investors, the cops carted off the corporate seals and certificates of Hermitage's Russian subsidiaries, a scene that's been widely reported. In Russia, these items give the holder corporate powers. Four months later, Hermitage discovered that a convicted killer named Victor Markelov was using those corporate tokens to act in the name of the Hermitage units. Strangely, what Markelov had done was consent to huge legal judgments against the Hermitage companies in a Tatarstan court 500 miles east of Moscow. Hermitage executives didn't recognize the names of any of the litigants. Stranger still, a lawyer named Andrei Pavlov represented parties on both sides of the lawsuits. The court found liability in an amount that exactly equaled Hermitage's $1 billion in profits for the 2006 tax year.

In early December 2007, Hermitage alerted Russian authorities to the corporate identity theft, with the help of lawyer Magnitsky from the Moscow firm of Firestone Duncan. Authorities waited until February 2008 to open an investigation. But Magnitsky was doing his own legwork, contacting over 50 tax and registry offices, until he found in June 2008 that the hijacked Hermitage subsidiaries had been reregistered in the tax district supervised by Olga Stepanova's tax bureau. He then learned that back in December 2007 Markelov and some cohorts had filed for a refund of the $230 million in taxes Hermitage had paid in 2006, according to a number of previous reports. They claimed the huge legal judgments in the Tatarstan court should offset the big taxes the firm had paid for its gain in Gazprom. Stepanova's bureau approved.

On Hermitage's behalf Magnitsky filed detailed criminal complaints in July 2008 with seven government agencies. He said he had uncovered a similar tax refund scheme that claimed $107 million from the government in 2006, using abandoned subsidiaries of the prominent Russian investment bank Renaissance Capital. He said the actors in that scheme included Lt. Col. Kuznetsov, Victor Markelov, Andrei Pavlov, Olga Stepanova and other familiar names from the Hermitage case. Magnitsky alleged that the mastermind in both schemes had been Dmitry Klyuev. In Klyuev's own testimony before his 2005 conviction in a separate case, he said he had been arranging huge tax refunds for clients since 2002.

AMAZINGLY, STEPANOVA'S OFFICE had taken just one day to approve the gargantuan $230 million refund. Russia's central bank quickly wired the money to brand-new accounts at a couple of banks in Moscow. Magnitsky said that one of them, Universal Savings Bank, was controlled by Klyuev using nominees that included the unfortunate conspirator who, according to the Interior Ministry, fell to his death from a penthouse window.

Before Russian authorities even opened their investigation in February of 2008, the $230 million had disappeared from Universal Savings. By June, the bank had voluntarily liquidated itself. As related to Barron's by Interior Ministry spokesperson Dudukina, it was the Universal Savings records that were destroyed in the explosion of the Kamaz truck in the middle of Moscow.

In October 2008, lawyer Magnitsky testified to Russian prosecutors about his allegations against Lt. Col. Kuznetsov and the others. After he gave an interview to BusinessWeek magazine (now Bloomberg Businessweek), Interior Ministry police arrested him and delivered him into the hands of Kuznetsov and other policemen that Magnitsky had implicated. For almost a year, according to the lawyer's complaints to prosecutors and police chiefs, the Interior Ministry subjected him to increasingly harsh conditions, pressuring him to retract his testimony and falsely implicate himself and Browder. In the centuries-old Butyrka prison complex the lawyer became gravely ill and, denied medical care, died on November 16, 2009.

Russian police agree that the $230 million refund was a heist. Five-year sentences were meted out to the two surviving front men -- the convicted killer and sawmill worker Markelov, and a convicted burglar named Vyacheslav Khlebnikov. Their trials were closed to the public, but Interior Ministry spokesperson Dudukina says both defendants said they had gotten their instructions from Hermitage lawyer Magnitsky. The Ministry has never produced any other evidence of Magnitsky's supposed guilt.

Tax-service employees like Stepanova were never under investigation or charged in the Hermitage case, Dudukina says. "Our investigation did not find anything criminal in the conduct of the tax-service workers," she says. "They were confused."

In the two years following the $230 million heist, Credit Suisse records show at least $20 million flowing through various bank accounts of dummy corporations with officers from places like Panama, Cyprus and the South Pacific nation of Vanuatu. Money-laundering compliance expert Martin Woods, of the London consultancy Hermes Forensic Solutions, cautions that the use of offshore shells to hide income and assets isn't, on its own, illegal. A bank's obligation to report money-laundering suspicions to its regulators arises from a combination of signs: shells, high-risk jurisdictions, a lack of legitimate commercial activity and politically connected individuals.

Hermitage's submission to Swiss regulators points out all these things in Credit Suisse account records. Browder says Hermitage's informant said the transactions were meant to pay off Stepanova and her deputies for aiding the tax scam.

Starting in the month after Stepanova's office approved the Dec. 24, 2007 refund, the Credit Suisse records show a stream of about $800,000 in payments for fancy building materials in Montenegro's seaside resort of Bar. Hermitage's information said that these were for a villa owned by the Stepanovs.

On Jan. 23, 2008 the Credit Suisse accounts received about $3 million from a shell company called Bristoll Export, registered in New Zealand by a company-formation agency called GT Group. After earlier Barron's stories showed that GT Group sold shells that were ultimately used to launder Mexican drug-cartel money through Wachovia Bank and, separately, to commission a plane filled with anti-aircraft missiles and rocket launchers from North Korea, New Zealand police raided GT Group's offices in October of 2010.

Nested inside the shell of Bristoll Export -- like a Russian doll -- was yet another shell company whose directors work at Midland Consult, a Russia-focused representative of offshore banks founded by a former Russian diplomat named Maxim A. Stepanov in Cyprus.

The GT Group didn't respond to questions e-mailed to its headquarters on the island of Vanuatu. Midland Group's Maxim Stepanov would not identify the owners of Bristoll Export and said in an e-mail that his customers were "honest, decent businessmen and have no criminal conduct found by the Courts of Justice."

A series of confirmation notices from 2007 to 2008 recount more than $4 million in payments toward a villa belonging to Vladlen Stepanov on Palm Jumeirah, the artificial island off the coast of Dubai, along with two condo units for Olga Tsareva and Elena Anisimova -- Olga Stepanova's deputies at Moscow Tax Inspection Office #28.

On Jan. 26, 2008 -- a month after the refund -- the shell company Arivust Holdings was incorporated by attorney Georgia Constantinous-Panayiotou, who leads the Cyprus office of a firm called GSL Law & Consulting, which offers offshore law and accounting services to Russians. GSL's managing partner Alexander Alexeev wrote the Russian-language book Offshore for Dummies.

THE CREDIT SUISSE records include a signed statement by Vladlen Stepanov declaring himself the beneficial owner of Arivust. In May and June 2008, the Credit Suisse accounts paid more than $10 million over to the account of Arivust. Calls and e-mailed questions to both GSL lawyers went unanswered.

In early February 2008, another $9 million arrived in the Credit Suisse accounts from other accounts held by companies registered in Moldova, Cyprus and the U.K. The U.K.-registered Nomirex Trading Limited, for example, was incorporated by Erez Maharal, a Gestalt therapist and bank-secrecy consultant in Zug, Switzerland. Nomirex's director was a yoga instructor in the Cyprus resort town of Limassol. While Nomirex was running $8 million through its accounts, it described its business as "inactive" in filings with the U.K.'s corporate regulator.

"I am very sorry if somehow the regular business practice may be abused," Maharal wrote in an e-mail. "However, I am not in any position to take any responsibilities for some fraud. Did not it occur to you that I am also the victim of the fraud?"

FINALLY, IN THE SUMMER OF 2009, the Credit Suisse records show some $2 million paid over to the account of a British Virgin Islands corporation called Aikate Properties. A separate beneficial ownership notice says that Aikate Properties belonged to Vladlen Stepanov.

But the most impressive trophy enjoyed by the Stepanovs is probably the ultra-modern "country home," built on land owned by Vladlen's 85-year old mother near the famous Arkhangelskoye estate of Prince Yusupov outside Moscow. Designed by the star architect Kozyr, the Stepanov home has won honors in architectural contests and has been appraised at more than $20 million.

Barron's wasn't able to reach the Stepanovs to ask how they had come into so much wealth, when Olga's obligatory income declarations showed less than $500,000 in cumulative after-tax income between herself and Vladlen for the years 1999 through 2009.

The shell-corporation merchants told Barron's to take our ethical concerns to the Swiss bank.

"Credit Suisse would have to have done due diligence on their clients, " says Mark Pieth, the University of Basel law professor who is bringing Browder's complaint to Swiss authorities. "They would have to have found that Vladlen Stepanov was married to the head of a tax authority and that the Stepanovs were bringing in more money than they should have in their possession."

In an e-mail, Credit Suisse spokesman Marc Dosch said the bank is confident in its control framework. "Credit Suisse takes allegations against its compliance standards very seriously," he wrote. Now Switzerland's attorney general can take them seriously, too.

Clarification

In "Crime and Punishment in Putin's Russia" (April 18, 2011), Barron's reported the "arrest" of a Russian federal tax service official who had audited Olga Stepanova, the controversial former chief of Russia's 28th District Tax Inspectorate. The auditor was not arrested, but "detained" and has since been released.